Implications and Potential Impact of Expanded UK-Russia Sanctions Legislation

As part of its response to the current situation in Ukraine, the UK Government has recently enacted sanctions legislation which introduces additional grounds for designations of individuals and entities under the existing UK-Russia sanctions regime. However, no new designations have been made under these grounds. In this post, we consider the implications and potential impact of these changes.

What Amendments Have Been Made?

Prior to the recent amendments, the UK-Russia sanctions regime (contained in The Russia (Sanctions) (EU Exit) Regulations 2019 (2019 Regulation) allowed for the designation of an "involved person", who was defined to be:

• Persons suspected to be or had been involved in "destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine"; and
• Persons owned by, controlled by, acting on behalf of or at the direction of, or associated with such persons.

The Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022 (which came into force at 5pm on 10 February 2022) (Amending Regulation) expanded the scope of "involved person" in the 2019 Regulation to include a person who "is or has been involved in … obtaining a benefit from or supporting the Government of Russia".

Such additional persons who might now be designated as an "involved person" in the include, amongst others, persons who are:

• carrying on business of economic significance to the Government of Russia;
• carrying on business in a sector of strategic significance to the Government of Russia;
• carrying on business as a Government of Russia-affiliated entity; and
• owning or controlling, directly or indirectly, or working as a director, trustee or equivalent of any of the above.

Nine Russian sectors are listed as ‘sectors of strategic significance’: (i) chemicals; (ii) construction; (iii) defence; (iv) electronics; (v) energy; (vi) extractives; (vii) financial services; (viii) information, communications and digital technologies; and (ix) transport. This includes sectors that are already targeted by sectorial sanctions, and new sectors.

However, the Amending Regulation does not identify what is or could be viewed as ‘business of economic significance’ to the Government of Russia.

A Government of Russia-affiliated entity is defined to include a person, other than a natural person: (i) which is owned or controlled directly or indirectly by the Government of Russia; (ii) in which the Government of Russia holds directly or indirectly a minority interest; (iii) which receives, or has received, financing, directly or indirectly, from the Russian Direct Investment Fund or the National Wealth Fund, (iv) which otherwise obtains a financial benefit or other material benefit from the Government of Russia.

In this context, ‘Government of Russia’ is defined to include: (i) the Presidency of the Russian Federation; (ii) public bodies and agencies subordinate to the President of the Russian Federation, including the Administration of the President of the Russian Federation; (iii) the Chairman of the Government of the Russian Federation and the deputies of the Chairman of the Government; (iv) any Ministry of the Russian Federation; (v) any other public body or agency of the Government of the Russian Federation, including the armed forces and law-enforcement organs of the Russian Federation; and (vi) the Central Bank of the Russian Federation.

Implications and Potential Impact

1. At this stage, the UK-Russia sanctions framework has been amended to expand the grounds for asset freeze designations. No new designations under these new grounds have been made to date, so there is no change to the current UK-Russia sanctions position.
2. However, the Amending Regulation does allow for designation of a broad range of individuals and entities to be made quickly and, potentially, with little prior notice in order to maximise the effect of any designations. Therefore, persons required to comply with UK sanctions may wish to carefully consider current and new exposures to counterparties and sectors specified in the Amending Regulation, and appropriate measures in the event of designations.
3. The Amending Regulation lays the groundwork for the designation of a wide range of prominent Russian individuals and well-known entities, including, notably, those entities in which the Russian government has a minority interest.
4. It also allows for the designation of entities owned or controlled by such persons. This means that it is open for non-Russian entities, such UK and EU subsidiaries, to come within scope by virtue of their ownership or control.
5. As we have previously seen from the designation of well-known entities in the past, their designation will likely result in heightened sanctions risk throughout supply chains that would need to be carefully managed.
6. The Amending Regulation does not introduce any new sanctions measures which might form part of the broad package of sanctions referenced previously by the UK Foreign Secretary. Such measures may well form part of what the UK Foreign Commonwealth & Development Office has described as "the framework for the strongest sanctions regime the UK has had against Russia".
7. The EU has not indicated to date whether it will expand its Russia sanctions framework in accordance with the approach adopted by the UK. In relation to sanctions policy more broadly, it remains to be seen whether the UK is moving towards a ‘trans-Atlantic’ sanctions position more akin to the style and scope of US sanctions.